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10 Criteria to Consider When Choosing the Right Online Broker

By: Kevin MercadanteUpdated: November 29, 2017

On the surface, choosing an online broker seems like a simple process. In reality, however, it isn’t always. You want to make sure this broker has the right credentials, understands the market, and has similar wealth-building beliefs as you do. There are at least 10 different criteria you should consider before deciding on the best broker for your individual investment needs.

1. Cost per Trade

Cost per trade is something of the holy grail of the online brokerage universe. Since it’s a number, it can be easily compared with competitors. But you have to be careful not to rely on a single cost, such as stock trade cost, since brokers typically have a wide assortment of fees.

Be sure to investigate all costs. Though one broker may have the lowest commission per trade on stocks, that will do you little good if you mostly trade options or invest in mutual funds, where the commissions may not be so attractive.

For help in determining across-the-board fees at popular online brokerage firms, check out our Online Broker Comparison List. It provides an unbiased side-by-side comparison of the most typical fees charged by the major firms.

2. Variety of Investment Options

A good broker is one that offers you the ability to invest in a large number of assets — stocks, bonds, mutual funds, exchange traded funds (ETFs), real estate investment trusts, options, futures and even certificates of deposit and U.S. government Treasury securities.

Even if you only want to invest in ETFs right now, you have to consider the possibility you may want to spread your investment wings in the future. For that, you will need a broker who can provide you with all of the possibilities.

3. Minimum Initial Investment Required

Most brokers have a minimum initial investment requirement, which may be many thousands of dollars. If you are a new investor, with little or no investment capital, it may not matter if a broker is the best in the industry if you can’t meet the required minimum account deposit.

There are actually brokers who have no minimum requirement or require only a few hundred dollars. Some large online brokerages that have no required minimum initial investment include Fidelity and Ally Invest.

4. Types of Retirement Accounts Available

Most popular brokers offer multiple types of retirement accounts to invest in, but it’s best to confirm this at the very beginning. Even if you want only a regular investment account right now, you may want to open an IRA or Roth IRA in the future. You may also decide you want to open a custodial account for one of your children or a 529 account for their college funds.

Confirming these options exist before you first sign on can save you a serious research job in the future. In addition, most investors like to have all of their various accounts with a single broker, particularly if they are happy with the service.

5. Proper Asset Allocation Guidance

Asset allocation is one of the more challenging investment functions for many people, especially for new investors. It can be complicated enough to decide on an initial asset allocation, but even more involved to maintain that allocation going forward. This will require periodic rebalancing, which is not the easiest of tasks if it must be done manually.

If this is a concern, you will need to find out if the broker offers this service and if there is an additional charge. Most robo advisor services will handle asset allocation — and automatic rebalancing — as part of their account management fee. If you’re looking for “hands off” investing, robo advisors could be the best option for you.

6. Direct Investment Advice

With the trend in online investing, DIY (do it yourself) investing has become the buzz phrase. But what if you’re not a DIY investor and have no interest in becoming one? This is where you’ll have to determine if a broker provides any direct investment advice and if there is any charge for the service.

Some brokers will offer limited investment advice, while others will provide a full investment advisory service, usually for a small fee. Still others may charge you for advice on an as-needed basis. One example of this is when you want to make a broker-assisted trade. Some firms will charge a higher transaction fee if you require broker assistance.

It’s important to understand that a major reason brokers are able to charge low transaction fees is precisely because they offer little or no human assistance. If you want that kind of advice or assistance, be sure to investigate the availability at any firms you are considering, and be aware that it is very likely to change the pricing structure.

7. Interest on Uninvested Funds

Though most brokers do offer interest on uninvested funds — usually at money market levels — not all do. That’s easy to overlook when interest bearing investments pay less than 1%, but it will become more important when interest rates rise to higher levels.

8. Third-Party Referrals

Before signing up with any broker, get opinions from people who either are currently invested with that firm or have been in the past. No matter how convincing a broker’s ads are, there could be issues that aren’t apparent to the casual observer.

At the same time, be careful about relying on information, opinions and advice provided by investment broker comparison sites. These sites are mostly aggregators that present brokerage services on an affiliate basis, which is to say they get paid to steer customers to the brokers.

You can spot these sites easily because they provide only the most superficial information, tell you everything is great, and never report any negatives connected with the service. These are ad sites, not objective advice sources, and they’re pretty easy to spot.

9. Quality (and Availability) of Customer Support

Even DIY investors sometimes need assistance from customer support. Make sure a firm offers such support and it’s available during more than just “regular business hours” (when your job might prevent you from calling).

Also check to see if it’s available in various forms. For example, email support and live chat can be more convenient contact methods than direct phone.

If you prefer physical locations, you should favor a broker that has a branch location in your area. E*TRADE, for example, has more than 500 branches throughout the country. Fidelity Investments also has branches available in and around most major cities.

10. Your Own Investment Personality

Are you an active trader or buy-and-hold investor? Whichever you are will affect your choice of brokers. If you are a buy-and-hold investor and mostly invest in index funds, making only a very few trades per year, fund selection may be more important to you than low transaction fees.

You may even decide to invest with a fund family, particularly if they charge no fees on their own funds. On the other hand, if you are an active trader, executing dozens of trades per year, then transaction fees will be a major consideration.

The main point in choosing a broker is a) make sure a broker offers the services and features you most need, and b) don’t pay extra for services and features you don’t need or want.

It doesn’t matter if a certain broker is the most popular in the industry or is used by millions of investors. Much as you would in selecting an attorney, a tax accountant or a financial planner, you have to choose the firm that will be the right fit for you.

Readers: What do you look for in the right investment broker or service?

“Asset allocation has to do with your risk tolerance,” says Rick Ferri, the founder and managing partner of Portfolio Solutions. “What you hope to achieve, and when you hope to achieve it, matter when figuring out your asset allocation.” […]

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